Buying a house with bad credit is possible, but not optimal. Buying a house is absolutely possible with bad credit, but it is harder and more expensive than it would be for people with excellent credit. Before starting the homebuying process, you should consider why you want to be a homeowner.
Homeownership has many large, unexpected costs that can be difficult to cover if your financial situation is unstable. Continuing to rent indefinitely or until your credit improves may be the best financial choice for you.
More specifically, a fair score is 580 to 669, while a poor score is 300 to 579. The thing about having poor credit is that it’s not the same as someone else’s bad credit.
No two situations are the same, and outside of your actual score, lenders will also be looking at things like:
How much the borrower has available for a down payment
The borrower’s overall amount of debt
How much income the borrower earns
If the borrower has any debts in collections
Cash is your best friend when you have bad credit and the more of it you have to use toward a down payment, the better. The reason for this is that your credit score might only qualify you for a certain mortgage loan amount. If you can cover the difference with cash, you can still afford the home you want.
The lender you end up with will also play a factor because all lenders will have different requirements. While you can get a bad credit loan, you must be prepared to pay a higher monthly mortgage payment due to much higher interest rates.
How To Buy A House With Bad Credit
Let’s check out some of the loan options available and the average credit score requirements for each of them.
Conventional Loans
There isn’t a set minimum requirement for income, credit score or down payment to qualify for a conventional loan. However, the minimum credit score required to qualify for a conventional mortgage loan is usually a 620 or better.
There are exceptions, though. If you have high income compared to your loan amount or a larger than minimum down payment, it might be easier to qualify for a conventional loan, even if you have a score a bit lower than 620.
FHA Loans
An FHA loan is a loan backed by the Federal Housing Administration. If you’re a first-time home buyer, FHA loans can be very attractive because of lower qualifying requirements..
The minimum credit score needed to get an FHA loan is 500.
FHA loans also have additional qualification requirements. For instance, you can use an FHA loan only to purchase a primary residence.
VA Loans
If you’re a veteran or currently serving in the armed forces, you could qualify for a VA loan.
A VA loan is backed by the Department of Veterans Affairs and allows for the purchase of a home with $0 down. Some lenders may have you pay a one-time “funding fee.”
As with FHA loans, your home must meet specific standards to qualify. And while the VA has no specific credit score minimum, most lenders do. Rocket Mortgage® for example, has a 580 minimum credit requirement.
USDA Loans
A USDA loan* is another loan backed by a government department, the U.S. Department of Agriculture. A loan from the USDA allows you to buy a home in a qualifying rural area with a $0 down payment.
Most lenders will require a 640 credit score to qualify for the loan, along with other income requirements specific to a USDA loan.
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